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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

 

Commission file number 0-14804

GENERAL ELECTRIC CAPITAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1109503


 


(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

     

260 Long Ridge Road, Stamford, CT

 

06927


 


(Address of principal executive offices)

 

(Zip Code)

 

(Registrant's telephone number, including area code) (203) 357-4000

_______________________________________________
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

At July 29, 2004, 1,064 shares of voting common stock, which constitutes all of the outstanding common equity, with a par value of $1,000 per share were outstanding.

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

(1)


Table of Contents

 

General Electric Capital Services, Inc.

Part I – Financial Information

 

Page

   


     Item 1. Financial Statements

   

          Condensed Statement of Current and Retained Earnings

 

3

          Condensed Statement of Financial Position

 

4

          Condensed Statement of Cash Flows

 

5

     Notes to Condensed, Consolidated Financial Statements (Unaudited)

 

6

     Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

 

12

     Item 4. Controls and Procedures

 

23

     

Part II – Other Information

   
     

     Item 6. Exhibits and Reports on Form 8–K

 

23

     Signatures

 

24

     

 

Forward-Looking Statements

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "will" or words of similar meaning and include, but are not limited to, statements about expected future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially from these expectations and assumptions due to changes in global political, economic, business, competitive, market, regulatory and other factors. We undertake no obligation to publicly update or review any forward-looking information, whether as a result of new information, future developments or otherwise.

(2)


 

 

Part I. Financial Information


Item 1. Financial Statements

Condensed Statement of Current and Retained Earnings
General Electric Capital Services, Inc. and consolidated affiliates
(Unaudited)

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


(In millions)

2004

 

2003

 

2004

   

2003

 






Revenues from services (note 8)

$

16,405

 

$

15,319

 

$

32,772

 

$

29,699

 

Sales of goods

 

728

   

568

   

1,304

   

1,055

 
 


 


 


   


 

Total revenues

 

17,133

   

15,887

   

34,076

   

30,754

 
 


 


 


   


 

Interest

 

2,818

   

2,533

 

5,489

   

4,996

 

Operating and administrative

 

5,227

   

4,610

 

10,523

   

8,693

 

Cost of goods sold

 

701

   

465

 

1,252

   

902

 

Insurance losses and policyholder and annuity benefits

 

3,808

   

4,256

 

7,432

   

8,241

 

Provision for losses on financing receivables

 

1,004

   

978

 

1,959

   

1,738

 

Depreciation and amortization

 

1,442

   

1,121

 

2,882

   

2,232

 

Minority interest in net earnings of consolidated affiliates

 

76

   

25

   

122

   

63

 
 


 


 


   


 

Total costs and expenses

 

15,076

   

13,988

   

29,659

   

26,865

 
 


 


 


   


 

Earnings before income taxes

 

2,057

   

1,899

 

4,417

   

3,889

 

Provision for income taxes

 

(361

)

 

(297

)

(876

)

 

(617

)

 


 


 


   


 

Net earnings

 

1,696

   

1,602

 

3,541

   

3,272

 

Dividends

 

(1,462

)

 

(159

)

(1,842

)

 

(328

)

Retained earnings at beginning of period

 

31,769

   

27,825

   

30,304

   

26,324

 
 


 


 


   


 

Retained earnings at end of period

$

32,003

 

$

29,268

 

$

32,003

 

$

29,268

 
 


 


 


   


 


See "Notes to Condensed, Consolidated Financial Statements."

   

(3)


 

 

Condensed Statement of Financial Position
General Electric Capital Services, Inc. and consolidated affiliates

(In millions)

June 30,
2004

 

December 31,
2003

 


 


 

(Unaudited)

   

Cash and equivalents

$

7,995

 

$

11,273

 

Investment securities

 

122,503

   

121,910

 

Financing receivables – net (note 5)

 

252,701

   

247,906

 

Insurance receivables

 

26,461

   

27,537

 

Other receivables – net

 

14,328

   

12,079

 

Inventories

 

190

   

197

 

Buildings and equipment, less accumulated amortization of $19,885 and
     $16,748

 

44,918

   

38,822

 

Intangible assets (note 6)

 

27,555

   

24,821

 

Other assets

 

72,239

   

69,981

 
 


 


 

Total assets

$

568,890

 

$

554,526

 
 


 


 

Borrowings (note 7)

$

325,311

 

$

320,318

 

Accounts payable

 

17,185

   

13,547

 

Insurance liabilities, reserves and annuity benefits

 

138,110

   

136,264

 

Other liabilities

 

23,961

   

23,238

 

Deferred income taxes

 

9,691

   

10,736

 



Total liabilities

514,258

504,103



Minority interest in equity of consolidated affiliates

8,737

5,115



Capital stock

11

11

Additional paid-in capital

12,342

12,258

Retained earnings

32,003

30,304

Accumulated gains/(losses) – net (a)

     Investment securities

222

1,823

     Currency translation adjustments

2,414

2,639

     Derivatives qualifying as hedges

(1,097

)

(1,727

)



Total shareowner's equity

45,895

45,308



Total liabilities and equity

$

568,890

$

554,526




(a)

The sum of accumulated gains/(losses) on investment securities, currency translation adjustments and derivatives qualifying as hedges constitutes "Accumulated nonowner changes other than earnings," and was $1,539 million and $2,735 million at June 30, 2004 and December 31, 2003, respectively.

 

See "Notes to Condensed, Consolidated Financial Statements."

(4)


 

 

Condensed Statement of Cash Flows
General Electric Capital Services, Inc. and consolidated affiliates

(Unaudited)

 

Six months ended
June 30

 
 


 

(In millions)

2004

 

2003

 



Cash Flows – Operating Activities

       

Net earnings

$

3,541

 

$

3,272

 

Adjustments to reconcile net earnings to cash provided from operating activities

           

          Provision for losses on financing receivables

 

1,959

   

1,738

 

          Depreciation and amortization

 

2,882

   

2,232

 

          Increase in accounts payable

 

3,078

   

928

 

          Increase in insurance liabilities, reserves and annuity benefits

 

1,930

   

495

 

          All other operating activities

 

(257

)

 

(915

)

 


 


 

Cash from operating activities

 

13,133

   

7,750

 



Cash Flows – Investing Activities

           

Increase in loans to customers

 

(133,199

)

 

(110,007

)

Principal collections from customers – loans

 

134,879

   

101,495

 

Investment in equipment for financing leases

 

(9,883

)

 

(9,856

)

Principal collections from customers – financing leases

 

9,994

   

9,954

 

Net change in credit card receivables

 

167

   

(1,757

)

Buildings and equipment:

           

     – additions

 

(5,432

)

 

(3,202

)

     – dispositions

 

2,272

   

2,509

 

Payments for principal businesses purchased

 

(15,484

)

 

(8,083

)

Purchases of securities by insurance and annuity businesses

 

(15,945

)

 

(27,531

)

Dispositions of securities by insurance and annuity businesses

 

14,630

   

25,229

 

All other investing activities

 

2,214

   

(2,555

)

 


 


 

Cash used for investing activities

 

(15,787

)

 

(23,804

)



Cash Flows – Financing Activities

           

Net decrease in borrowings (maturities 90 days or less)

 

(2,013

)

 

(4,075

)

Newly issued debt:

           

     Short-term (91-365 days)

 

242

   

738

 

     Long-term senior

 

27,716

   

36,234

 

     Non-recourse, leveraged lease

 

283

   

168

 

Repayments and other debt reductions:

           

     Short-term (91-365 days)

 

(21,320

)

 

(16,341

)

     Long-term senior

 

(2,033

)

 

(1,518

)

     Non-recourse, leveraged lease

 

(363

)

 

(521

)

Proceeds from sales of investment contracts

 

7,010

   

4,443

 

Redemption of investment contracts

 

(8,304

)

 

(4,237

)

Dividends paid

 

(1,842

)

 

(328

)

 


 


 

Cash from/(used for) financing activities

 

(624

)

 

14,563

 



Decrease in cash and equivalents

 

(3,278

)

 

(1,491

)

 

           

Cash and equivalents at beginning of year

 

11,273

   

7,918

 



Cash and equivalents at June 30

$

7,995

 

$

6,427

 
 


 


 


See "Notes to Condensed, Consolidated Financial Statements."

 

(5)


 

 

Notes to Condensed, Consolidated Financial Statements (Unaudited)

     1. The accompanying condensed, consolidated quarterly financial statements represent the consolidation of General Electric Capital Services, Inc. and all of our affiliates (GECS). Companies that we directly or indirectly control (consolidated affiliates), include General Electric Capital Corporation (GE Capital) and GE Global Insurance Holding Corporation (GE Global Insurance Holding), the parent of Employers Reinsurance Corporation (ERC). As described in our Annual Report on Form 10-K for the year ended December 31, 2003, we reorganized our businesses on January 1, 2004, around markets and customers. On March 30, 2004, we provided the required reclassified prior-period information about this reorganization in a Form 8-K.

We have reclassified certain prior-period amounts herein to conform to the current period's presentation.

     2. The condensed, consolidated quarterly financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of the results of operations, financial position and cash flows. The results reported in these condensed, consolidated quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. We label our quarterly information using a calendar convention, that is, first quarter is labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our longstanding practice to establish actual interim closing dates using a fiscal calendar, which requires our businesses to close their books on a Saturday. The effects of this practice are modest and only exist within a reporting year. The fiscal closing calendar from 1993 through 2013 is available on our Web site, www.ge.com/en/company/investor/secreports.htm.

     3. We adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities (Revised), on January 1, 2004, adding $2.6 billion of assets and $2.1 billion of liabilities to our consolidated balance sheet as of that date. The most significant entity consolidated was Penske Truck Leasing Co., L.P. (Penske), which was previously accounted for using the equity method. Penske provides full-service commercial truck leasing, truck rental and logistics services, primarily in North America. This accounting change did not require an adjustment to earnings and will not affect future earnings or cash flows. We adopted FIN 46, Consolidation of Variable Interest Entities, on July 1, 2003, and at that date consolidated certain entities in our financial statements.

     4. FIN 46 and FIN 46R changed the accounting for certain types of entities we use in the ordinary course of our securitization activities. Securitization entities consolidated as a result of FIN 46 and FIN 46R differ from other entities included in our consolidated financial statements because, by terms of relevant governing documents, the assets they hold, which are typically financial in nature, are legally isolated and are unavailable to us under any circumstances. Similarly, their liabilities are not our legal obligations but repayment depends primarily on cash flows generated by their assets. These securitization entities normally issue debt in the form of asset-backed securities, that is, debt secured by assets in the entity. We refer to certain of these entities as "consolidated, liquidating securitization entities" because we do not intend to replace the assets they contain; rather, we intend that such entities will liquidate as their assets are repaid. Beginning in the second quarter of 2004, we reclassified the assets, liabilities and operations of consolidated, liquidating securitization entities into the associated financial statement captions. Because their assets and liabilities differ from other assets and liabilities in our financial statements, we are providing supplemental information about these matters below and

(6)


 

 

in notes 5 and 7. Also, to ensure that we have presented all of our securitization activities clearly, we also are providing information about off-balance sheet assets in securitization entities.

 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 



Assets in consolidated, liquidating securitization entities are shown
    in the following captions:

           

          Investment securities

$

1,363

 

$

1,566

 

          Financing receivables – net (note 5)

 

16,870

   

21,877

 

          Other assets

 

2,746

   

2,352

 

          Other, principally insurance receivables

 

457

   

668

 
 


 


 

               Total

 

21,436

   

26,463

 
 


 


 

Off-balance sheet (a)

 

25,787

   

23,561

 
 


 


 

Total securitized assets

$

47,223

$

50,024

 


 


 
 

(a)

Of amounts off-balance sheet, $6,253 million at June 30, 2004 and $5,759 million at December 31, 2003, were in entities to which we provide credit and/or liquidity support.

 
         
         

We continue to engage in off-balance sheet securitization transactions with third-party entities and to use public market, term securitizations. The following table provides further information about the nature of the assets in securitization entities that are both consolidated and off-balance sheet.

 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 
 


 


 

Receivables and other assets secured by:

           

     Equipment

$

14,052

 

$

15,616

 

     Commercial real estate

 

15,505

   

16,713

 

     Other assets

 

9,298

   

9,114

 

     Credit card receivables

 

8,368

   

8,581

 
 


 


 

Total securitized assets

$

47,223

 

$

50,024

 
 


 


 

 

     5. Financing receivables are summarized in the following table.

 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 
 


 


 

Time sales and loans, net of deferred income

$

192,207

 

$

188,842

 

Investment in financing leases, net of deferred income

 

67,100

   

65,320

 
 


 


 
   

259,307

   

254,162

 

Allowance for losses on financing receivables

 

(6,606

)

 

(6,256

)

 


 


 

Financing receivables – net

$

252,701

 

$

247,906

 
 


 


 

 

(7)


 

 

Included in the above are the financing receivables of consolidated, liquidating securitization entities as follows:

 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 
 


 


 

Time sales and loans, net of deferred income

$

14,023

 

$

18,050

 

Investment in financing leases, net of deferred income

 

2,864

   

3,827

 
 


 


 
   

16,887

   

21,877

 

Allowance for losses on financing receivables

 

(17

)

 

 
 


 


 

Financing receivables – net

$

16,870

 

$

21,877

 
 


 


 

     6. Intangible assets are summarized in the following table.

 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 
 


 


 

Goodwill

$

24,377

 

$

21,527

 

Present value of future profits (PVFP)

 

1,576

   

1,562

 

Capitalized software

 

776

   

800

 

Other intangibles

 

826

   

932

 
 


 


 

Total

$

27,555

 

$

24,821

 
 


 


 

 


Intangible assets were net of accumulated amortization of $10,312 million at June 30, 2004, and $10,323 million at December 31, 2003.

 

GOODWILL

Changes in goodwill balances follow.

 

2004

 
 


 

(In millions)

Commercial
Finance

 

Consumer
Finance

 

Equipment & Other Services

 

Insurance

 

Total

 
 


 


 


 


 


 

Balance at January 1

$

8,627

 

$

7,779

 

$

1,029

 

$

4,092

 

$

21,527

 

Acquisitions/purchase
     accounting adjustments (a)

 

799

   

1,036

   

3

   

9

   

1,847

 

Inter-segment transfers

523

 

384

 

(523

)

(384

)

 

Currency exchange and other

 

(34

)

 

(36

)

 

1,042

(b)

 

31

 

1,003

 
 


 


 


 


 


 

Balance at June 30

$

9,915

 

$

9,163

 

$

1,551

 

$

3,748

 

$

24,377

 
 


 


 


 


 


 


(a)

The amount of goodwill related to new acquisitions recorded during the first six months of 2004 was $1,470 million; the largest of these acquisitions were WMC Finance Co. ($564 million) by Consumer Finance and Sophia S.A. ($475 million) and most of the commercial lending business of Transamerica Finance Corporation ($308 million) by Commercial Finance. The amount of goodwill related to purchase accounting adjustments during the first six months of 2004 was $377 million, primarily associated with the 2003 acquisition of First National Bank ($252 million) by Consumer Finance. Upon closing an acquisition, we estimate the fair values of assets and liabilities acquired and consolidate the acquisition as quickly as possible. Given the time it takes to obtain pertinent information to finalize the acquired company's balance sheet (frequently with implications for the price of the acquisition), then to adjust the acquired company's accounting policies, procedures, books and records to our standards, it is often several quarters before we are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for our initial estimates to be revised subsequently.

 

(b)

Includes $1,055 million of goodwill associated with the consolidation of Penske effective January 1, 2004.

 

(8)


 

 

INTANGIBLES SUBJECT TO AMORTIZATION

 

At June 30, 2004

 

At December 31, 2003

 
 


 


 

(In millions)

Gross
carrying
amount

 

Accumulated
amortization

 

Net

 

Gross
carrying
amount

 

Accumulated
amortization

 

Net

 
 


 


 


 


 


 


 

PVFP

$

3,433

 

$

(1,857

)

$

1,576

 

$

3,379

 

$

(1,817

)

$

1,562

 

Capitalized software

 

1,657

   

(881

)

 

776

   

1,560

   

(760

)

 

800

 

Servicing assets (a)

 

3,545

   

(3,432

)

 

113

   

3,539

   

(3,392

)

 

147

 

Patents, licenses and other

 

394

   

(217

)

 

177

   

304

   

(201

)

 

103

 

All other

 

990

   

(458

)

 

532

   

1,095

   

(417

)

 

678

 
 


 


 


 


 


 


 

Total

$

10,019

 

$

(6,845

)

$

3,174

 

$

9,877

 

$

(6,587

)

$

3,290

 
 


 


 


 


 


 


 


 

(a)

Servicing assets, net of accumulated amortization, are associated primarily with serviced residential mortgage loans amounting to $10 billion and $14 billion at June 30, 2004 and December 31, 2003, respectively.

 
     

Indefinite-lived intangible assets were $4 million at June 30, 2004 and December 31, 2003, and related primarily to patents, licenses and other.

     Amortization expense related to amortizable intangible assets was $227 million and $162 million, for the quarters ended June 30, 2004 and 2003, respectively. Amortization expense related to amortizable intangible assets was $375 million and $460 million, for the six months ended June 30, 2004 and 2003, respectively.

PRESENT VALUE OF FUTURE PROFITS

     Change in PVFP balances follow.

(In millions)

Six months ended
June 30, 2004

 

Six months ended
June 30, 2003

 


 


Balance at January 1

$

1,562

 

$

2,457

 

Acquisitions

 

   

 

Dispositions

 

   

(574

)

Accrued interest (a)

 

32

   

38

 

Amortization

 

(100

)

 

(184

)

Other

 

82

   

(99

)

 


 


 

Balance at June 30

$

1,576

 

$

1,638

 
 


 


 

(a)

Interest was accrued at a rate of 5.0% and 4.0% for the six months ended June 30, 2004 and 2003, respectively.

 

(9)


 

 

We evaluate recoverability of PVFP periodically by comparing the current estimate of expected future gross profits with the unamortized asset balance. If such comparison indicates that the expected gross profits will not be sufficient to recover PVFP, the difference is charged to expense. No such expense was recorded in the six months ended June 30, 2004 or 2003.

     Amortization expense for PVFP in future periods will be affected by acquisitions, realized capital gains and losses and other factors affecting the ultimate amount of gross profits realized from certain lines of business. Similarly, future amortization expense for other intangibles will depend on acquisition activity and other business transactions. The estimated percentage of the December 31, 2003, net PVFP balance to be amortized over each of the next five years follows.

 

2004

     

2005

     

2006

     

2007

     

2008

 
 


     


     


     


     


 

8.8

%

 

8.2

%

 

7.5

%

 

6.9

%

 

6.4

%

                           

     7. Borrowings are summarized in the following table.

 

Consolidated
Borrowings

 

Other than
consolidated,
liquidating
securitization entities

 

Consolidated,
liquidating
securitization entities

 




 

At

 
 


 

(In millions)

6/30/04

 

12/31/03

 

6/30/04

 

12/31/03

 

6/30/04

 

12/31/03

 
 


 


 


 


 


 


 

Short-term borrowings

                                   
                                     

Commercial paper

                                   

     Unsecured

$

82,615

 

$

80,598

 

$

82,615

 

$

80,598

 

$

 

$

 

     Asset-backed

 

17,311

   

21,998

   

   

   

17,311

   

21,998

 

Current portion of long-
     term debt

 

43,495

   

38,367

   

42,796

   

37,885

   

699

   

482

 

Other

 

16,227

   

14,505

   

16,227

   

14,505

   

   

 
 


 


 


 


 


 


 

Total

 

159,648

   

155,468

   

141,638

   

132,988

   

18,010

   

22,480

 
 


 


 


 


 


 


 

Long-term borrowings

                                   
                                     

Senior notes

 

151,969

   

150,997

   

150,380

   

149,049

   

1,589

   

1,948

 

Extendible notes

 

12,502

   

12,591

   

12,219

   

12,229

   

283

   

362

 

Subordinated notes

 

1,192

   

1,262

   

1,192

   

1,262

   

   

 
 


 


 


 


 


 


 

Total

 

165,663

   

164,850

   

163,791

   

162,540

   

1,872

   

2,310

 
 


 


 


 


 


 


 

Total borrowings

$

325,311

 

$

320,318

 

$

305,429

 

$

295,528

 

$

19,882

 

$

24,790

 
 


 


 


 


 


 


 
                                     

 

(10)


 

 

     8. Revenues from services are summarized in the following table.

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

Premiums earned by insurance businesses

$

4,218

 

$

5,024

 

$

8,467

 

$

9,637

 

Interest on time sales and loans

 

4,616

   

4,220

   

9,314

   

8,179

 

Operating lease rentals

 

2,584

   

1,779

   

5,069

   

3,513

 

Investment income

 

1,666

   

1,534

   

3,117

   

3,054

 

Financing leases

 

1,074

   

983

   

2,180

   

2,042

 

Fees

 

925

   

470

   

1,795

   

1,345

 

Other income (a)

 

1,322

   

1,309

   

2,830

   

1,929

 
 


 


 


 


 

Total

$

16,405

 

$

15,319

 

$

32,772

 

$

29,699

 
 


 


 


 


 

(a)

Includes the loss on the Genworth Financial, Inc. (Genworth) initial public offering of $388 million for the second quarter and six months ended June 30, 2004.

     9. A summary of increases (decreases) in shareowner's equity that did not result directly from transactions with the shareowner, net of income taxes, follows.

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

Net earnings

$

1,696

 

$

1,602

 

$

3,541

 

$

3,272

 

Investment securities – net changes in value

 

(3,302

)

 

2,449

   

(1,601

)

 

3,260

 

Currency translation adjustments – net

 

(173

)

 

738

   

(225

)

 

864

 

Derivatives qualifying as hedges – net changes in value

 

654

   

(938

)

 

630

   

(1,054

)

 


 


 


 


 

Total

$

(1,125

)

$

3,851

 

$

2,345

 

$

6,342

 
 


 


 


 


 

     10. On May 28, 2004, we completed the initial public offering of approximately 146 million, or 30%, of the common shares of Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducts most of our life and mortgage insurance operations. The transaction resulted in a pre-tax loss of $570 million ($336 million after tax) reported in our Insurance segment.

(11)


 

 

Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with generally accepted accounting principles (GAAP). Certain of these data are considered "non-GAAP financial measures" under Securities and Exchange Commission regulations; those rules require the supplemental explanation and reconciliation provided in Exhibit 99 to this Form 10-Q report.

     See the Segment Operations section on page 14 for a more detailed discussion of our businesses.

A. Results of Operations

Overview of Second Quarter and First Half of 2004 with Second Quarter and First Half of 2003

Our second quarter 2004 results reflected the continued benefits of our ongoing strategies. Consumer Finance and Commercial Finance continued to grow with total assets up 20% and 8%, respectively, in the second quarter of 2004 compared with the second quarter of 2003. We closed two strategic acquisitions during the second quarter of 2004 – WMC Finance Co., a U.S. wholesale lender by Consumer Finance and the U.S. leasing business of IKON Office Solutions by Commercial Finance. On May 28, 2004, we completed an initial public offering of approximately 146 million, or 30%, of the common shares of Genworth Financial, Inc. (Genworth), our formerly wholly-owned subsidiary that conducts most of our life and mortgage insurance operations. The effects of the transaction resulted in a pre-tax loss of $0.6 billion ($0.3 billion after tax) recognized in the Insurance segment.

     Revenues for the second quarter and first half of 2004 increased 8% and 11%, respectively, over the comparable periods of 2003. The increase in revenues resulted from acquisitions and origination growth, primarily at Commercial Finance and Consumer Finance, and the consolidation of certain businesses as a result of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities (Revised), partially offset by the absence of revenues from businesses disposed of in 2003 and the effects of the Genworth initial public offering at Insurance.

     Net earnings for the second quarter and first half of 2004 increased 6% and 8%, respectively, over the comparable periods of 2003. Three of our four businesses – Commercial Finance, Consumer Finance and Equipment & Other Services – contributed double-digit improvements to earnings during the second quarter and first half of 2004.

    We integrate acquisitions as quickly as possible and only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses.

(12)


 

 

Effects of the acquisitions and dispositions on comparisons of our operations follow.     

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In billions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 
                 

Acquisitions

                       

Revenues

$

0.9

 

$

0.5

 

$

1.8

 

$

1.1

 

Net earnings

$

0.1

 

$

0.1

 

$

0.3

 

$

0.1

 
                         

Dispositions

                       

Revenues

$

(0.9

)

$

(0.3

)

$

(1.8

)

$

(0.6

)

Net earnings

$

(0.1

)

$

 

$

(0.3

)

$

 

     Other factors that were important to our reported operations included the first quarter consolidation of Penske Truck Leasing Co., L.P., (Penske), which previously was accounted for using the equity method. Penske provides full-service commercial truck leasing, truck rental and logistics services, primarily in North America. This consolidation increased our reported revenues ($0.8 billion for the second quarter and $1.6 billion for the first half of 2004); we reported the increase primarily as operating lease rentals ($0.6 billion for the second quarter and $1.2 billion for the first half of 2004) and other income ($0.2 billion for the second quarter and $0.4 billion for the first half of 2004). Net earnings were unaffected by this change because our share of Penske earnings were previously reported on a one-line basis.

     Provision for income taxes for the second quarter and first half of 2004 (effective tax rates of 17.5% and 19.8%, respectively), compared with the second quarter and first half of 2003 (effective tax rates of 15.6% and 15.9%, respectively) increased primarily because growth in our pre-tax earnings at Commercial Finance, Consumer Finance and Equipment & Other Services was principally from sources subject to tax at a rate higher than our average rate for 2003. This increase was partially offset by our settling several issues with the U.S. Internal Revenue Service and adjustments to our full-year estimated effective tax rate for 2004, in accordance with policy, to reflect the tax benefits associated with the disposition of Genworth shares.

(13)


 

 

SEGMENT OPERATIONS

Revenues and net earnings by operating segment for the second quarters and six months ended June 30, 2004 and 2003, are summarized and discussed below. As discussed in our 2003 Annual Report on Form 10-K, effective January 1, 2004, we made changes to the way we report our segments. We have reclassified certain prior-period amounts herein to conform to the current period's presentation.

CONSOLIDATED

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

REVENUES

               

Commercial Finance

$

5,732

 

$

5,180

 

$

11,123

 

$

9,956

 

Consumer Finance

 

3,830

   

3,046

   

7,419

   

5,805

 

Equipment & Other Services

 

2,017

   

869

   

4,027

   

1,833

 

Insurance

 

5,554

   

6,792

   

11,507

   

13,160

 
 


 


 


 


 

     Total revenues

$

17,133

 

$

15,887

 

$

34,076

 

$

30,754

 
 


 


 


 


 

NET EARNINGS

                       

Commercial Finance

$

975

 

$

832

 

$

1,930

 

$

1,702

 

Consumer Finance

 

600

   

514

   

1,202

   

1,060

 

Equipment & Other Services

 

68

   

(252

)

 

(54

)

 

(510

)

Insurance

 

53

   

508

   

463

   

1,020

 
 


 


 


 


 

     Total net earnings

$

1,696

 

$

1,602

 

$

3,541

 

$

3,272

 
 


 


 


 


 
                 

 

(14)


 

 

COMMERCIAL FINANCE

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

REVENUES

$

5,732

 

$

5,180

 

$

11,123

 

$

9,956

 
 


 


 


 


 

NET REVENUES

                       

Total revenues

$

5,732

 

$

5,180

 

$

11,123

 

$

9,956

 

Interest expense

 

1,442

   

1,462

   

2,835

   

2,935

 
 


 


 


 


 

Total net revenues

$

4,290

 

$

3,718

 

$

8,288

 

$

7,021

 
 


 


 


 


 

NET EARNINGS

$

975

 

$

832

 

$

1,930

 

$

1,702

 
 


 


 


 


 
                 
 

At

 
 


 

(In millions)

6/30/04

 

6/30/03

 

12/31/03

 
 


 


 


 

TOTAL ASSETS

$

223,045

 

$

207,175

 

$

214,016

 
 


 


 


 

 

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

REAL ESTATE

               

Revenues

$

598

 

$

599

 

$

1,201

 

$

1,202

 
 


 


 


 


 

Net earnings

$

215

 

$

198

 

$

445

 

$

464

 
 


 


 


 


 

AVIATION SERVICES

                       

Revenues

$

777

 

$

710

 

$

1,492

 

$

1,424

 
 


 


 


 


 

Net earnings

$

133

 

$

126

 

$

277

 

$

261

 
 


 


 


 


 
                 

At

 


 

(In millions)

6/30/04

 

6/30/03

 

12/31/03

 
 


 


 


 

REAL ESTATE

                 

Total assets

$

31,416

 

$

29,157

 

$

27,767

 
 


 


 


 

AVIATION SERVICES

                 

Total assets

$

35,668

 

$

32,305

 

$

33,271

 
 


 


 


 

 

           

Commercial Finance revenues and net earnings increased 11% and 17%, respectively, from the second quarter of 2003. The increase in revenues resulted primarily from acquisitions ($0.7 billion) and origination growth, partially

(15)


 

 

offset by lower securitization activity ($0.1 billion). The increase in net earnings resulted primarily from acquisitions ($0.1 billion) and origination growth, partially offset by lower securitization gains ($0.1 billion).

     Commercial Finance revenues and net earnings increased 12% and 13%, respectively, from the first six months of 2003. The increase in revenues resulted primarily from acquisitions ($1.1 billion), origination growth, and higher investment gains ($0.1 billion), partially offset by lower securitization activity ($0.1 billion). The increase in net earnings resulted primarily from acquisitions ($0.2 billion) and higher investment gains ($0.1 billion), partially offset by lower securitization gains ($0.1 billion).

     The most significant acquisitions affecting Commercial Finance results in 2004 were the U.S. leasing business of IKON Office Solutions, acquired during the second quarter of 2004; the commercial lending business of Transamerica Finance Corporation and Sophia S.A., both acquired during the first quarter of 2004; and the assets of CitiCapital Fleet Services, acquired during the fourth quarter of 2003. These businesses contributed $0.6 billion and $0.1 billion to second quarter 2004 revenues and net earnings, respectively, and $1.0 billion and $0.1 billion to revenues and net earnings, respectively, for the first six months of 2004.

CONSUMER FINANCE

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 

REVENUES

$

3,830

 

$

3,046

 

$

7,419

 

$

5,805

 
 


 


 


 


 

NET REVENUES

                       

Total revenues

$

3,830

 

$

3,046

 

$

7,419

 

$

5,805

 

Interest expense

 

844

   

672

   

1,617

   

1,251

 
 


 


 


 


 

Total net revenues

$

2,986

 

$

2,374

 

$

5,802

 

$

4,554

 
 


 


 


 


 

NET EARNINGS

$

600

 

$

514

 

$

1,202

 

$

1,060

 
 


 


 


 


 

 

               
 

At

 
 


 

(In millions)

6/30/04

 

6/30/03

 

12/31/03

 
 


 


 


 

TOTAL ASSETS

$

116,851

 

$

97,117

 

$

106,530

 
 


 


 


 
             

Consumer Finance revenues and net earnings increased 26% and 17%, respectively, from the second quarter of 2003. The increase in revenues resulted primarily from origination growth, the net effects of the weaker U.S. dollar ($0.3 billion), acquisitions ($0.2 billion) and higher securitization activity ($0.2 billion), partially offset by the 2003 divestiture of The Home Depot private label credit card receivables ($0.3 billion). The increase in net earnings resulted primarily from origination growth, acquisitions, the net effects of the weaker U.S. dollar and higher securitization activity, partially offset by the absence of The Home Depot private label credit card receivables divested in 2003.

     Consumer Finance revenues and net earnings increased 28% and 13%, respectively, from the first six months of 2003. The increase in revenues resulted primarily from acquisitions ($0.6 billion), higher securitization

(16)


 

 

activity ($0.5 billion), origination growth, and the net effects of the weaker U.S. dollar ($0.5 billion), partially offset by the 2003 divestiture of The Home Depot private label credit card receivables ($0.6 billion). The increase in net earnings resulted primarily from origination growth, acquisitions, the net effects of the weaker U.S. dollar and higher securitization activity, partially offset by the absence of The Home Depot private label credit card receivables divested in 2003, and increased costs to launch new products and promote brand awareness in 2004.

     Our most significant acquisitions affecting Consumer Finance in 2004 were First National Bank, which provides mortgage and sales finance products in the United Kingdom, the U.S. retail sales finance unit of Conseco Finance Corp. (Conseco) and GC Corporation (GC Card), which provides credit card and sales finance products in Japan. We acquired First National Bank and Conseco in the second quarter of 2003, and GC Card in the third quarter of 2003. These businesses contributed $0.1 billion to second quarter 2004 revenues and $0.4 billion and $0.1 billion to revenues and net earnings, respectively, for the first six months of 2004.     

EQUIPMENT & OTHER SERVICES

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 
                 

REVENUES

$

2,017

 

$

869

 

$

4,027

 

$

1,833

 
 


 


 


 


 

NET EARNINGS

$

68

 

$

(252

)

$

(54

)

$

(510

)

 


 


 


 


 

 

               

Equipment & Other Services revenues and net earnings increased $1.1 billion and $0.3 billion, respectively, from the second quarter of 2003. Revenues increased as a result of the adoption of FIN 46R ($0.8 billion), primarily including operating lease rentals ($0.6 billion) and other income ($0.2 billion), and FIN 46 ($0.2 billion). The most significant entity consolidated as a result of FIN 46R was Penske, which was previously accounted for using the equity method. The increase in net earnings resulted primarily from the absence of 2003 investment losses and 2004 investment gains at GE Equity ($0.1 billion).

     Equipment & Other Services revenues and net earnings increased $2.2 billion and $0.5 billion, respectively, from the first six months of 2003. Revenues increased as a result of the adoption of FIN 46R ($1.6 billion), primarily including operating lease rentals ($1.2 billion) and other income ($0.4 billion), and FIN 46 ($0.6 billion). The increase in net earnings resulted primarily from the absence of 2003 investment losses and 2004 investment gains at GE Equity ($0.2 billion).

(17)


 

 

INSURANCE

 

Second quarter ended
June 30

 

Six months ended
June 30

 
 


 


 

(In millions)

2004

 

2003

 

2004

 

2003

 
 


 


 


 


 
                 

REVENUES

$

5,554

 

$

6,792

 

$

11,507

 

$

13,160

 
 


 


 


 


 

NET EARNINGS

$

53

 

$

508

 

$

463

 

$

1,020

 
 


 


 


   


 

GE GLOBAL INSURANCE

                       

     HOLDING (ERC)

                       

Revenues

$

2,666

 

$

3,065

 

$

5,313

 

$

5,758

 
 


 


 


 


 

Net earnings

$

142

 

$

119

 

$

282

 

$

240

 
 


 


 


 


 

 

               

Insurance revenues and net earnings decreased 18% and 90%, respectively, from the second quarter of 2003. The decrease in revenues resulted primarily from the 2003 dispositions ($0.8 billion), including GE Edison Life Insurance Company, Financial Guaranty Insurance Company and ERC Life Reinsurance Corporation; the effects of the Genworth initial public offering ($0.4 billion) and net declines in volume resulting from strategic exits of certain business channels, primarily at ERC ($0.4 billion). These decreases were partially offset by the net effects of the weaker U.S. dollar ($0.2 billion). The overall decrease in net earnings resulted primarily from the effects of the Genworth initial public offering and the 2003 dispositions referred to above, partially offset by favorable earnings at ERC, reflecting lower 2004 adverse development on prior year claim reserves.

     Insurance revenues and net earnings decreased 13% and 55%, respectively, from the first six months of 2003. The decrease in revenues resulted primarily from the 2003 dispositions ($1.5 billion), including GE Edison Life Insurance Company, Financial Guaranty Insurance Company and ERC Life Reinsurance Corporation; net declines in volume resulting from strategic exits of certain business channels, primarily at ERC ($0.6 billion) and the effects of the Genworth initial public offering ($0.4 billion). These decreases were partially offset by the net effects of the weaker U.S. dollar ($0.3 billion) and continued favorable pricing at ERC ($0.1 billion). The overall decrease in net earnings resulted primarily from the effects of the Genworth initial public offering and the 2003 dispositions referred to above, partially offset by favorable earnings at ERC, reflecting lower 2004 adverse development on prior year claim reserves.

(18)


 

 

B. STATEMENT OF FINANCIAL POSITION

OVERVIEW OF FINANCIAL POSITION

Major changes in our financial position resulted from the following.

·      During 2004, we completed our acquisitions of the commercial lending business of Transamerica Finance Corporation, Sophia S.A., a real estate company in France, WMC Finance Co., a U.S. wholesale lender and the U.S. leasing business of IKON Office Solutions. At their respective acquisition dates, these transactions resulted in a combined increase in total assets of  $18.1 billion, of which $11.2 billion was financing receivables before allowance for losses, and a combined increase in total  liabilities of approximately $4.6 billion, of which $2.9 billion was debt.

·      On May 28, 2004, we completed the initial public offering of approximately 146 million, or 30%, of the common shares of Genworth, our formerly wholly-owned subsidiary that conducts most of our life and mortgage insurance operations. This transaction resulted in an increase to minority interest of $3.4 billion.

·      We adopted FIN 46R on January 1, 2004, adding $2.6 billion of assets and $2.1 billion of liabilities to our consolidated balance sheet as of that date, primarily relating to Penske.

INVESTMENT SECURITIES comprise mainly investment-grade debt securities held by Insurance in support of obligations to annuitants and policyholders. Investment securities were $122.5 billion at June 30, 2004, compared with $121.9 billion at December 31, 2003. The increase of $0.6 billion was the net result of investing premiums received and reinvesting investment income ($3.1 billion), partially offset by declines in debt markets.

     We regularly review investment securities for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and the financial health and specific prospects for the issuer. Of securities with unrealized losses at June 30, 2004, approximately $0.1 billion was at risk of being charged to earnings in the next twelve months; approximately half of this amount related to commercial airlines.

     Impairment losses for the first six months of 2004 totaled $0.1 billion compared with $0.4 billion in the comparable 2003 period. Impairments in both periods were recognized for issuers in a variety of industries; we do not believe that any of the impairments indicated likely future impairments in the remaining portfolio.

     Gross unrealized gains and losses were $3.1 billion and $2.2 billion, respectively, at June 30, 2004, compared with $4.6 billion and $1.2 billion, respectively, at year end 2003, primarily reflecting a decrease in the estimated fair value of debt securities as interest rates increased. We estimate that available gains, net of resulting impairment of insurance intangible assets, could be as much as $1.5 billion at June 30, 2004. The market values we used in determining unrealized gains and losses are those defined by relevant accounting standards and should not be viewed as a forecast of gains or losses.

     Investment securities collateralized by commercial aircraft and in an unrealized loss position for twelve months or more as of June 30, 2004, had an aggregate amortized cost of $1.2 billion and an estimated fair value of

(19)


 

 

$0.8 billion. We believe that these securities are in an unrealized loss position because of ongoing negative market reaction to difficulties in the commercial airline industry. Of this $0.4 billion of unrealized losses on securities that have been trading below amortized cost for more than 12 months, approximately 99% is related to securities that are current on all contractual principal and interest terms. For these securities, we do not foresee changes in the timing and amount of estimated cash flows and expect full recovery of our amortized cost. Further, should our cash flow expectation prove to be incorrect, the current market values of aircraft collateral, as obtained from independent appraisers, exceeded both the market value and amortized cost of our securities.

FINANCING RECEIVABLES is our largest category of assets and represents one of our primary sources of revenues. The portfolio of financing receivables, before allowance for losses, increased to $259.3 billion at June 30, 2004, from $254.2 billion at December 31, 2003, as discussed in the following paragraphs. The related allowance for losses at June 30, 2004, amounted to $6.6 billion compared with $6.3 billion at December 31, 2003, representing our best estimate of probable losses inherent in the portfolio.

     A discussion of the quality of certain elements of the financing receivables portfolio follows. For purposes of that discussion, "delinquent" receivables are those that are 30 days or more past due; "nonearning" receivables are those that are 90 days or more past due (or for which collection has otherwise become doubtful); and "reduced-earning" receivables are commercial receivables whose terms have been restructured to a below-market yield.

     Commercial Finance financing receivables, before allowance for losses, totaled $142.4 billion at June 30, 2004, compared with $135.7 billion at December 31, 2003, and consisted of loans and leases to the equipment, commercial and industrial, real estate and commercial aircraft industries. This portfolio of receivables increased primarily from acquisitions ($13.2 billion) and origination growth ($5.2 billion), partially offset by securitizations and sales ($11.0 billion) and the net effects of foreign currency translation ($0.4 billion). Related nonearning and reduced-earning receivables were $1.8 billion (1.2% of outstanding receivables) at June 30, 2004, compared with $1.7 billion (1.3% of outstanding receivables) at December 31, 2003. Commercial Finance financing receivables are generally backed by assets and there is a broad spread of geographic and credit risk in the portfolio. Gross write-offs were $0.3 billion and $0.6 billion for the first six months of 2004 and 2003, respectively; recoveries were modest.

     Consumer Finance financing receivables, before allowance for losses, were $98.6 billion at June 30, 2004, compared with $94.7 billion at December 31, 2003, and consisted primarily of card receivables, installment loans, auto loans and leases, and residential mortgages. This portfolio of receivables increased as a result of origination growth ($3.2 billion), acquisitions ($0.8 billion) and the net effects of foreign currency translation ($0.4 billion), partially offset by securitization activity ($0.4 billion). Nonearning consumer receivables at June 30, 2004, were $2.6 billion (2.6% of outstanding receivables), compared with $2.5 billion (2.6% of outstanding receivables) at December 31, 2003. This is the result of growth in our secured financing business, a business that tends to experience relatively higher delinquencies but relatively lower losses than the rest of our consumer portfolio, offset by improved portfolio quality and collection results. Gross write-offs for the first six months of 2004 were $1.7 billion compared with $1.4 billion for the first six months of 2003. Recoveries for the first six months of 2004 were $0.4 billion, the same as the 2003 period.

     Equipment & Other Services financing receivables, before allowance for losses, amounted to $18.3 billion and $23.8 billion at June 30, 2004, and December 31, 2003, respectively and consisted primarily of financing

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receivables in consolidated, liquidating securitization entities, that were consolidated as a result of adoption of FIN 46. This portfolio of receivables decreased because we have ceased transferring assets to these entities. Nonearning receivables at June 30, 2004, were $0.1 billion (0.8% of outstanding receivables), compared with $0.1 billion (0.6% of outstanding receivables) at December 31, 2003.

     Approximate delinquency rates on managed Commercial Finance equipment loans and leases and Consumer Finance financing receivables follow.

 

At

 
 


 
 

6/30/04

 

12/31/03

 

6/30/03

 
 


 


 


 

Commercial Finance

1.67

%

1.37

%

1.84

%

Consumer Finance

5.58

%

5.57

%

5.81

%

             

Delinquency rates at Commercial Finance increased from December 31, 2003 to June 30, 2004, reflecting collection results. The decline from June 30, 2003 to June 30, 2004, reflects improved economic conditions and collection results.

     Delinquency rates at Consumer Finance increased slightly from December 31, 2003 to June 30, 2004, as a result of growth in our secured financing business, partially offset by improved portfolio quality. The decline from June 30, 2003 to June 30, 2004, reflects improved portfolio quality and collection results, partially offset by growth in our secured financing business.

C. ADDITIONAL CONSIDERATIONS

Commercial Airlines

For our total commercial airline portfolio, we recognized impairment losses on leases, loans and investment securities of $0.1 billion in the first six months of 2004, the same as the first six months of 2003. Equipment under operating leases is subject to our routine impairment review process, which we conduct at least annually considering current and estimated future lease rates as well as customer prospects. We regularly and comprehensively evaluate the recoverability of our loan and investment securities portfolio and assess prospects of our customers. Based upon our consideration of relevant factors, we do not believe that any of our positions is impaired at June 30, 2004.

     Three commercial airline customers are, or have recently been, operating under bankruptcy protection. Following is a discussion of those airlines.

     US Airways Group, parent of US Airways, emerged from its 2002 bankruptcy on March 31, 2003. Our June 30, 2004, US Airways position of $2.8 billion comprised loans, leases, investment securities and commitments, all substantially secured by various equipment, including aircraft. During 2004, as US Airways continued to experience financial difficulties and debt rating downgrade, we negotiated improved terms on our previously committed regional jet financing and obtained certain cross-default provisions. We continue to monitor US Airways' progress in implementing the revised business plan under which all of our obligations would be satisfied in accordance with their terms.

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     UAL Corp., the parent company of United Airlines, is currently operating under bankruptcy protection. Our June 30, 2004, United Airlines position of $1.4 billion comprised loans fully secured by commercial aircraft and assets subject to operating leases.

     Air Canada is currently operating under Canadian bankruptcy protection. Our June 30, 2004, Air Canada position of $2.6 billion was fully secured and comprised debtor-in-possession (DIP) financing during the reorganization period as well as loan and lease arrangements. A significant portion of Air Canada's lease obligations to us is cross-collateralized by security for the DIP facility.

D. DEBT INSTRUMENTS

During the first six months of 2004, GECS and GECS affiliates issued $27 billion of long-term debt, including $3 billion issued by Genworth in connection with the initial public equity offering described on page 11.  This debt was both fixed and floating rate and was issued to institutional and retail investors in the U.S. and 14 other global markets.  Maturities ranged from one to 30 years. We used the proceeds primarily for repayment of maturing long-term debt, but also for acquisitions and organic growth. We anticipate that we will issue between $26 billion and $31 billion of additional long-term debt during the remainder of 2004, although the ultimate amount we issue will depend on our needs, and on the markets.

     Following is an analysis of our debt obligations other than debt of consolidated, liquidating securitization entities at June 30, 2004, and December 31, 2003.

 

At June 30, 2004

 

At December 31, 2003

 


 


Senior notes

54

%

 

55

%

Commercial paper

27

   

27

 

Current portion of long-term debt

14

   

13

 

Other – bank and other retail deposits

5

   

5

 
 


   


 

Total

100

%

 

100

%

 


   


 

During the first six months of 2004, we paid $1.5 billion of special dividends to GE, of which $1.3 billion was generated from the proceeds of the Genworth initial public offering and $0.2 billion was related to more efficient capital management in the Insurance segment.

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Item 4. CONTROLS AND PROCEDURES

Under the direction of our Chairman of the Board (serving as the principal executive officer) and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of June 30, 2004, and (ii) no change in internal control over financial reporting occurred during the quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

Part II. Other Information

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

a.

Exhibits

 

 

 

Exhibit 12

Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

 

 

 
 

Exhibit 31(a)

Certifications of Principal Executive Officer Pursuant to Rule 13a-14(a) under the Exchange Act

 

 

 
 

Exhibit 31(b)

Certifications of CFO Pursuant to Rule 13a-14(a) under the Exchange Act

 

 

 
 

Exhibit 32

Certifications Pursuant to 18 U.S.C. Section 1350

 

 

 
 

Exhibit 99

Financial Measures That Supplement Generally Accepted Accounting Principles

b.

Reports on Form 8-K during the quarter ended June 30, 2004.

 

 

 
 

None

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

General Electric Capital Services, Inc.
(Registrant)

 

 

July 30, 2004

 

/s/ Philip D. Ameen


 


Date

 

Philip D. Ameen
Senior Vice President and Controller
Duly Authorized Officer and Principal Accounting Officer